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Andrew Body & Simon Jensen argue efficient credit allocation to reduce the cost of capital for business and improve productivity is a silver bullet for the NZ economy

Banking / opinion
Andrew Body & Simon Jensen argue efficient credit allocation to reduce the cost of capital for business and improve productivity is a silver bullet for the NZ economy

By Andrew Body & Simon Jensen*

Nicola Willis has been reported in a recent debate with the Grant Robertson saying she wants to widen the scope of the Commerce Commission's banking market study to include examining business banking settings, which would include looking into the effect of the Reserve Bank's prudential settings and how they might impact the willingness of commercial banks to lend to businesses.

The Commerce Commission’s banking study does not extend to business banking but should. Based on submissions that have been made to date, the RBNZ's prudential settings that impact business banking should be very firmly in the study's sights. Certainly, this seems at the heart of a number of the concerns expressed by the New Zealand owned challenger banks – Co-operative Bank, Kiwibank, SBS Bank, and TSB Bank.

However, if Nicola Willis is the next Minister of Finance, there are far quicker and more effective ways for her to address concerns about the RBNZ’s prudential settings than relying on the Commerce Commission report in August next year.

We made some suggestions for a fix in our earlier article “Bank prudential regulation is hurting productivity, it’s time to fix it”, published in on 3 August.

Here we add to and expand on some of those suggestions.

The incoming Minister of Finance should:

1. Immediately issue a new Financial Policy Remit to the RBNZ under s.203 of the Reserve Bank of New Zealand Act. That Financial Policy Remit should focus on:

 implementing prudential settings that enhance productivity and economic growth in New Zealand – rather than the current weak requirement of simply requiring the RBNZ to have regard to those things;

 facilitating competition and innovation in the financial sector through a proportional approach to prudential regulation; and

 requiring the RBNZ to review its risk framework and its approach of wanting to adopt a more conservative approach to prudential management than its international peers.

2. Appoint a prudential policy committee consisting of experienced and independent, non-executive individuals with the skills to be responsible for all of the RBNZ’s prudential management (i.e., legal, financial and banking skills) and give that prudential policy committee a statutory mandate (by amending the Reserve Bank of New Zealand Act 2021 to adopt the monetary policy committee formula in sections 101 to 105 and 117 to 132 of the Act). The charter of the prudential policy committee should include:

 ensuring that RBNZ’s prudential policies are completely consistent with the financial policy remit (and not the current weak approach of having regard to and ensuring they are not "inconsistent with" the Financial Policy Remit);

 reviewing the current RBNZ work programme with the aim of eliminating or reducing many of its projects to improve its focus on its functions – and using international models as a starting point;

 overseeing compliance by RBNZ to the rule of law (given its relatively unique position as a regulator that also sets the rules). This should include both:

 ensuring that prudential rules are consistent with not just the letter of its statutory delegations but the purposes expressed by Parliament in relation to those delegations;


 overseeing directions given by the RBNZ to ensure that they are consistent with its legal powers (so that situations like CBL, where the Court found the directions were not lawfully given by the RBNZ does not occur again).

 liaising with the International Monetary Fund, Basel Committee and probably Australian Prudential Regulation Authority to explain the approach being taken and ensuring it is consistent with international practice for small economies like New Zealand.

3. Require the Prudential Policy Committee to review a specific set of prudential standards which may have a negative impact on productivity and reduce the length of time it takes to develop policies.

Such review should include:

 the appropriateness of existing risk weightings used for capital adequacy purposes – particularly those relating to business lending and alternative housing tenures;

 eliminating as far as possible the difference between the risk weightings applying to the large banks (internal rating based) as opposed to the standardised ratings that other banks must use;

 the assumptions which have been used to determine the quantum of capital required by New Zealand banks in light of international norms (and in particular whether New Zealand should adopt a one in 100-year failure assumption as opposed to the one in 200-year failure assumption currently used);

 ensuring that the levy principles used to fund depositor compensation take into consideration the contagion impacts of large bank failure and encourage competition and financial inclusion as a key component of the levy framework;

 changing the decision not to allow contingent convertible debt as Alternative Tier One capital (when all other peer regulators allow it and it expands the capital options available to New Zealand banks);

 removing the open bank resolution policy - it didn't work in Cyprus a decade ago and has now been superseded internationally by much more credible mechanisms like bail-in debt;

 opening access to RBNZ financial support to all entities that it regulates and in particular ensuring that all prudentially supervised entities have access to exchange settlement accounts and Reserve Bank funding (including as a lender of last resort) on a fair and equitable basis - currently those facilities are typically only available to the larger banks or at least most easily exploited by the large banks; and

 ensuring the RBNZ branch policy is more consistent with international practice and in particular, potentially enables Indo-Asia Pacific banks to enter the New Zealand market.

While these are things that a new Minister of Finance can do, there are also elements of current National and ACT policy which should be enacted swiftly to remove deadweight compliance costs in financial regulation and which would help productivity. These are steps the Minister of Finance would likely have to work on with the Minister of Commerce and include:

 requiring an independently chaired Council of Financial Regulators to institute a single reporting model for regulated entities (so that multiple reports containing similar data are not provided to multiple regulators). Data which is not relevant should be removed from reporting. Regulators should be required to identify must have and nice to have data and why as part of this exercise;

 the Council of Financial Regulators coordinating and limiting consultations to no more than one a month across the entire financial sector as well as capping the size of consultations and requiring agencies to be transparent about the number of changes proposed as a result of the consultations;

 substantially simplifying the CCCFA (noting the current government has started this process but opted for an unhelpful middle ground option when it should have opted for the full review). This should involve removing matters (including consequences) related to affordability and disclosure where New Zealand's approach is in some cases a significant outlier from international practice.

Resources can if need be, be redirected to better enforcement of existing hardship rules;

 removing the licensing requirement created in the Conduct of Financial Institutions legislation applying to banks and non-bank deposit takers; and

 examining what further changes can be made to New Zealand's anti-money laundering rule to simplify them without compromising international obligations.

In essence, substantial regulatory failure and red tape in credit allocation is hurting New Zealand consumers (and at best protecting a only very small percentage of them) and our powerhouses of innovation and employment, small and medium sized businesses. This regulatory failure is a failure of inaction by Parliament and the executive arm of government.

The fragile state of the New Zealand economy and long-term decline in our productivity is very serious.

Price instability and poor productivity have many vectors to the misery of New Zealanders that is all around us.

Fixing failing education, infrastructure, fiscal responsibility and other regulation to improve productivity are worthy projects, but they are long term and complex projects with uncertain outcomes. However efficient credit allocation to reduce the cost of capital for business and improve our productivity is indeed a silver bullet.

A slightly more ambitious new government would free up foreign direct investment and re-orient the tax system towards innovation and productivity.

But in any event, a new government can easily address the problems with small and medium sized businesses’ access to credit, to improve productivity. The detailed steps set out above are a practical way for a new government to make a substantial and immediate contribution to our economy.

*Andrew Body is a company director, active investor and investment banker. He has an MCom in economics and an LLB from the University of Auckland.

**Simon Jensen is a legal consultant with a BCom in accounting and LLB from the University of Auckland.

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Needs fixing. When you approach banks to talk about business, their first question is "how much is your house worth".


It was always on the house for my business.  I had a mortgage arrangement that was flexible, allowing me to increase or decrease the balance as I chose.

The bank was a bit interested in the business progress up to about year 2000.  After that they showed no interest at all.

Suited me fine.  And I never paid "business rates".  So the interest cost was cheaper



Andrew, Simon - do you have children? Potentially grandchildren? 

What do you think they'll ask you, about your myopic concentration on 'economic growth'? 

They'll point out that humanity is a species, like any other. It needs habitat. like any other. It needs energy inputs, like any other. It needs other resources, more than any other. And it competes both with others, and intra, for said resources and energy. 

There are Limits to every physical growth, within a Bounded System (they won't have taught you that in Econ, of course..). We are over-shot of several of those limits NOW - thanks only to resource-stock draw-down. Does that figure in your figures? No? 

Ask what took us over the brink, and there is one answer: the (blind) pursuit of 'economic growth'. 

Yet at this late stage, you advocate more? 

Madness. And I'll bet that is what they will tell you, if they live to do so. How did we end up here, so late, so blind?


A very well written and thought-out article.


'Fixing failing education, infrastructure, fiscal responsibility and other regulation to improve productivity are worthy projects, but they are long term and complex projects with uncertain outcomes. However efficient credit allocation to reduce the cost of capital for business and improve our productivity is indeed a silver bullet.'

You call that well though out? 

What do stuff into your petrol tank? Cash? Plastic cards? Does that work out well for you?………



I'm not arguing against the fact we are in a world of finite fossil resources that fuel the current standard of living, and I support self-sustainability. While I understand your consistent push for reducing reliance on fossil energy and focusing on planning degrowth, the reality is that this concept is too hard for the masses to adopt currently as people struggle to feed their families and afford to transport themselves to their jobs in much of the country. The reality currently is that individually there's a need to plan and act accordingly if you're able, factor the eventual depletion into your chosen location to live, mode of transport etc.
In the short-medium term, focusing on shifting incentive for banks to hold a heavy portfolio in residential housing towards business lending will reduce barriers to entry for those wishing to start a business and innovate, create jobs and income, and the flow on effects this brings to the economy.


Thank you for the polite reply - but your last sentence is an oxymoron - what is that 'income' going to buy? 

Processed parts of the planet, is what. There is no other source.

See the problem? Not only doesn't interest/usury fit into a degrowth-requiring world, profit probably cannot be accommodated either. 

This is a phase-shift which takes some getting your head around. 

Go well


I see your point, which brings about the great conundrum; how do we bring a mass cultural shift that minimalism is more ideal than mass consumerism?


Money also buys services, partially powered by fossil fuels, but also by human mental or physical activity (hairdressers, lawn mowing/hedge trimming, financial advice on how to degrowth and prepare for the worst).


Ideal scenario: Lets bank not create money for mortgages.
Something like building societies should 'raise' deposits first from economy - then can lend out to people to gamble on properties. This way they will work hard to 'raise' money then lend it. Right now its so easy for them  - Create loan and deposit at the same time . Loan interest default to floating (highest) . Deposit rate starts with lowest interest rate .

Right now banks make huge margin right from the start of money creation - without doing any work , without any economic activity


DTI ratios and a far lower OCR to incentivise productivity/investment into things which aren't housing, cash savings etc


It won't be fixed because politicians don't understand much about productivity and have  even less interest in doing anything about increasing it. Just buy and sell houses and pump up immigration - NZs perpetual economic policy.


This will destroy the country.